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SEC Seeks $5.3B Judgment Against Terraform Labs and Do Kwon

The United States Securities and Exchange Commission (SEC) has initiated legal proceedings against Terraform Labs and its co-founder, Do Kwon, by submitting a demand for the company to pay civil fines and disgorgement in the amount of billions of dollars. The SEC has filed a petition in response to a judgement in a civil matter, and the purpose of the move is to hold Terraform Labs and Kwon responsible for the alleged violations they have committed.

Disgorgement and Civil Penalties: The Securities and Exchange Commission (SEC) has demanded that Terraform Labs and Kwon pay roughly $4.7 billion in disgorgement and prejudgment interest. Disgorgement is the process of repaying earnings that were obtained by dishonest means, while prejudgment interest is a kind of compensation for the time worth of money. Moreover, the Securities and Exchange Commission is requesting a total of $520 million in civil penalties, with Terraform Labs being responsible for $420 million and Kwon being responsible for $100 million.

possible Solutions: Terraform Labs and Kwon have both submitted their briefs in the civil case, in which they propose several possible solutions to the problem. In their proposal, Terraform Labs suggested a maximum civil penalty of $3.5 million, whereas Kwon suggested a penalty of $800,000. The SEC’s proposed sums are much higher than these estimates, which are substantially lower.

The Securities and Exchange Commission (SEC) is contemplating the imposition of further measures to deter future breaches, in addition to the disgorgement and civil penalties that have already been imposed. The Securities and Exchange Commission has requested that Kwon be prohibited from acting as an officer or director of a securities company. In addition, the Securities and Exchange Commission is attempting to get a “conduct-based injunction” in order to guarantee that Terraform Labs and Kwon would not commit breaches of a similar kind in the future.

The importance of SEC enforcement is shown by the fact that the SEC has filed a request for disgorgement and civil penalties against Terraform Labs and Do Kwon. This action demonstrates the regulatory agency’s dedication to safeguarding investors and prosecuting those who violate securities laws. By ensuring that both people and businesses are held responsible for their activities, the Securities and Exchange Commission (SEC) strives to preserve the integrity of the financial markets and to encourage fair practices.

Image source: Shutterstock

Terraform Labs Sues US SEC for Illegally Issuing a Subpoena on its CEO

Terraform Labs, the Singapore-based blockchain startup behind the Terra protocol, has filed a lawsuit against the United States Securities and Exchange Commission (SEC) for allegedly issuing an illegal Subpoena on its Chief Executive Officer- Do Kwon.

Kwon and Terraform Labs posited that the SEC does not have jurisdiction to serve the Subpoena as it did as the blockchain protocol is based outside of the U.S.

The challenge raised by Subpoena that Kwon and his lawyer, Denton US LLP, was served by the SEC earlier this year as the American market watchdog demanded that Terraform Labs produce documents to support a probe into the network’s Mirro Protocol, a decentralized finance protocol built on Terra that is governed by its stakeholder community.

Kwon and Dentons revealed in the filing that despite its hours of deliberations with the SEC to make the regulator understand what the Mirror Protocol is all about and how the SEC’s concerns could be addressed. The regulator still went ahead to serve a subpoena for documents that are not readily available. The filing reads:

“The SEC attorneys were well aware that TFL and Mr. Kwon had consistently maintained that the SEC lacked jurisdiction over TFL and Mr Kwon, and at no time asked Dentons lawyers whether it was authorized to accept service of subpoenas,”

Kwon and his lawyers flagged the process in which the Subpoena was issued and asked the court to declare them null and void as they do not follow SEC’s own rules.

The lawsuit also maintained that the market regulator did not keep the confidentiality it is meant to follow in issuing the Subpoena as the commission hired a private agent with the name, Cavalier Courier And Process Services who delivered the Subpoena in a way to embarrass and intimidate Kwon at Messari’s Mainnet event where the CEO was scheduled to make a presentation.

While the SEC is renowned for pursuing controversial probes, a blockchain firm seems to have taken the fight to the regulator this time. Prior to the time, the case will be concluded, Kwon and his lawyers pray the court to adjourn the compliance dates of the Subpoenas.

Terra Founder Do Kwon Agrees to $1M Bet on the Future Price of LUNA

What better way is it for a startup’s founder to spend his money than for him to bet on the success of his project? This could be tagged as the case of Do Kwon, the founder of Terraform Labs, the blockchain startup in charge of the Terra blockchain and LUNA coin.

Do Kwon has just accepted a $1 million bet from a Twitter user named Sensei Algod, a self-proclaimed semi-retired degen who believes the price of LUNA is going to be much lower by this time next year.

Algod announced the challenge through his Twitter account saying, “Who wants to take a $1000000 bet that $luna will be lower price in 1 year than now?” and specifically tagging Do Kwon and other prominent figures in the ecosystem. Kwon simply accepted the challenge saying “Cool, I’m in.”

The daring bet has gotten tongues wagging not just because of the amount involved but also because of the Terra platform’s seemingly impressive positivity in today’s crypto ecosystem.

Terra is a blockchain protocol that uses fiat-pegged stablecoins to power price-stable global payments systems. According to its white paper, the protocol combines the price stability and wide adoption of fiat currencies with the censorship-resistance of Bitcoin (BTC) and offers fast and affordable settlements.

Based on its features and the superiority of the transactions it facilitates, the Terra ecosystem has seen over $25.33 billion in Total Value Locked (TVL) hosting innovative protocols like Anchor Protocol, Lido, and Astroport, amongst others. The platform’s LUNA coin has also recorded a relatively high and astronomical growth amidst the current market drip. The coin is trading for $91.34, down by just 13.14% from its All-Time High (ATH) of $104.58 inked about 6 days ago.

The increasing demand on LUNA based on the ecosystem built around it has made many projects a more ambitious price target for the coin, and in 12 months we would find out who wins the bet the way Mike Novogratz won a bet of 0.5 BTC on President Joe Biden’s election bet back in 2020.

Terra Erases 12 Months Bullish Gains with 94% Drop in Value

The Terra community is almost in disarray as the ecosystem’s two flagship tokens, including LUNA and UST are on a freefall amid the most bearish sentiment the blockchain protocol has ever seen.

While the algorithmic UST stablecoin has completely lost its peg against the US Dollar, trading at $0.7158 at the time of writing, the stablecoin dropped as low as $0.2998 during the intra-day trading.

LUNA on the hand has shed off all of the gains it has accrued over the past 12 months as it slumped to its 52-weeks low of $0.8384. The fall of the LUNA comes off as a bigger surprise to the crypto world as such a plunge is uncommon, especially for an established blockchain protocol that attained its All-Time High (ATH) of $119.18 barely a month ago.

In his explanation of the cause of the current situation, Do Kwon, the founder of the Terra blockchain protocol said in a tweet that “the price stabilization mechanism is absorbing UST supply (over 10% of total supply), but the cost of absorbing so much stablecoins at the same time has stretched out the on-chain swap spread to 40%, and Luna price has diminished dramatically absorbing the arbs.”

While he did not discount the challenges the next couple of weeks will bring while trying to rebuild the protocol, he promised to be there every step of the way.

Yet, crypto experts believe that the crash of UST would stablecoins are still valuable by playing robust roles in the volatile market.

“It’s important now to acknowledge that Terra is a so-called algorithmic stablecoin, not directly backed by USD. The most popular stable coins like Tether (USDT) and USDC are actually backed by USD in the bank and both of those survived yesterday’s market sell-off well,” Ransu Salovaara, CEO at Likvidi, said.

“The de-pegging will likely result in a substantial regulatory risk – if not for the whole crypto space, then certainly for the stablecoins market. Anto Paroian.” said Chief Operating Officer, at crypto/digital asset hedge fund ARK36.

The promise of Kwon is a very significant one in the broad attempt to return LUNA and UST back to their glory days. While investors are currently doubtful of the next path for the two digital currencies, the scenario playing out now is different from those of Sushiswap when the founder, Chef Nomi rug pulled that he sold off his SUSHI tokens.

Sam Bankman-Fried took over the project at the time and helped it regain its balance. Do Kwon said he is still committed to the recovery of the LUNA tokens and this should come off as good news to those looking to hold the coins for much longer.

“Terra’s return to form will be a sight to behold. We’re here to stay. And we’re gonna keep making noise,” he tweeted.

SBF Suggests LUNA's Collapse Different to Theranos, but Questioning its Marketing Strategy

FTX Derivatives Exchange’s billionaire CEO Sam Bankman-Fried, known as SBF, has faulted the marketing strategies that were employed by the embattled Terra blockchain to gain acceptance from the public.

These comments come on the heels of the protocol’s two tokens, LUNA and UST, losing their value and peg to the US Dollar respectively.

While many people have been comparing the crash of Terra to the collapse of Theranos, a once innovative healthcare technology that was founded and managed by Elizabeth Holmes. To Bankman-Fried, the downfall of both startups cannot be compared as Elizabeth lied to investors about a technology that was not working in order to keep getting funding.

He believed the operations and management of Terra, led by Do Kwon, were transparent. The face of the Terra ecosystem has not failed to talk about the fact that UST is not backed by the US Dollar but by a set of volatile cryptocurrencies like Bitcoin and Terra. Should these coins plunge, the stablecoin stands the risk of also losing its peg.

While Bankman-Fried noted that he is not making excuses for Kwon and the Terra purveyors, he believes the fall of the protocol should be markedly classified differently from that of Theranos.

“Luna was a case of mass enthusiasm, excitement, and–frankly–marketing and memes–driving people to believe in something which was going to falter according to the publicly available information. That marketing was probably bad. But it wasn’t the *same* type of bad as Theranos,” He said in a Twitter thread over the weekend.

The fall of the Terra protocol has been classified as a watershed moment for the cryptocurrency ecosystem. While it seems as though the network cannot be salvaged, a number of support and proposals to revive the ailing blockchain is being proposed as we speak.

In a bid to make his followers understand that Terra is not necessarily conceived as a Ponzi scheme, Bankman-Fried said other legitimate companies, including Netflix, have also lost at least 50% of their value since the start of the year.

Do Kwon Suggests Terra Hard Fork to Revive Troubled Network

Do Kwon, the CEO of Terraform Labs, believes hard forking the Terra blockchain will play an instrumental role in saving the troubled network.

In a series of tweets, Kwon suggested:

“The Terra chain as it currently exists should be forked into a new chain without algorithmic stablecoins called “Terra” (token Luna – LUNA), and the old chain be called “Terra Classic” (token Luna Classic – LUNC). Both chains will coexist.”

According to Investopedia, a hard fork refers to a radical change to the protocol of a blockchain network that effectively results in two branches, one that follows the previous protocol and one that follows the new version. In a hard fork, holders of tokens in the original blockchain will be granted tokens in the new fork as well, but miners must choose which blockchain to continue verifying.

After being forked, the new chain, Terra (LUNA), will not support the algorithmic TerraUSD (UST) stablecoin, whereas the old one will house the Luna Classic (LUNC) token.

Kwon’s proposal for a hard fork is based on the lack of a consensus among different stakeholders. He stated:

“Competing interests from varied stakeholders (e.g.,$LUNA holders, UST holders, Terra builders, etc.) make it extremely difficult and unlikely to achieve consensus on a cohesive, congruent plan.”

Therefore, the new LUNA will be airdropped to residual UST holders, essential app developers, and LUNC holders.

The rain started beating the Terra network after UST’s price experienced a free fall to the extent that leading crypto exchange Binance temporarily halted its withdrawals together with that of LUNA.

Things got worse for LUNA, given that it sent shockwaves to the crypto market by collapsing to near-zero overnight.

At the time, Kwon pointed out that the price stabilization mechanism had a hand in the problem. He noted:

“The price stabilization mechanism is absorbing UST supply (over 10% of total supply), but the cost of absorbing so much stablecoins at the same time has stretched out the on-chain swap spread to 40%, and Luna price has diminished dramatically absorbing the arbs.”

If Kwon’s proposal sees the light of day, the new chain will go live on May 27 because he trusts that Terra is more than UST.

Prosecutors Investigate Do Kwon with Ponzi Fraud Charges amid Terraform Labs Dissolvement

Do Kwon’s scandal seem to be deepening. Prosecutors are investigating whether they will file Ponzi fraud charges against him following the Terra crash, according to The Korea Times.

This comes a day after LUNA and UST investors filed a legal complaint against Do Kwon and Daniel Shin, the co-founders of Terraform Labs. LUNA and UST are the native tokens of the Terra network developed by South Korean fintech company Terraform Labs.

Having wiped out at least $38 billion of investors’ money in a week, prosecutors in South Korea are delving deeper into the Terra crash. For instance, the Seoul Southern District Prosecutors Office that is leading the case intends to seek the services of an investigation team based on lodged complaints and various factual backgrounds.

Per the announcement:

“Prosecutors in charge of the case are looking into whether they can make a Ponzi scheme case against “Anchor Protocol,” under which depositors of TerraUSD are guaranteed a 20 percent annual return.”

Financial authorities believe 280,000 South Korean investors hold approximately 70 billion LUNA coins, even though the exact amount remains unknown.

Earlier this week, relevant governmental agencies beefed up crypto exchange inspections to try and unravel what transpired during the crash.

Did Do Kwon dissolve Terraform Labs just days before the crash?

Reportedly, Kwon dissolved Terraform Labs on April 30, just days before the Terra tokens came down with a thud.

According to Digital Today, based on official documents in the custody of South Korea’s supreme court registry office, the decision to terminate the firm was reached at a general shareholders meeting held on April 30.

Similar sentiments were shared by a Reddit user, who noted:

“KWON-DO-HYUNG is listed in this Korean document as dissolving his company Terraform Labs on April 30th, registered May 4th. The act of dissolving just days before the collapse of UST suggests the intent to eliminate responsibility for the aftermath, which serves as evidence that he knew something was going to happen.”

Moreover, Kwon was recently slapped with a tax evasion fine of $78 million, Blockchain.News reported.

Terraform Labs Staff Discloses LUNA's Potential Risk of Crash but Neglected: South Korean Authority

Carried out by the Seoul Southern District Prosecutor’s Office’s joint financial and securities crime investigation team, The staff of Embattled blockchain startup Terraform Labs have been called for questioning as part of an investigation.

As reported by local news channel JTBC, the inquiry sought to know whether Do Kwon and the purveyors of the blockchain network were aware of the flaws in the system and its model before deploying and promoting it to global investors.

The suspicion of the Prosecutors seems to be answered as an unnamed staff who joined Terraform Labs as an early developer back in 2019 disclosed that there were concerns raised back then with respect to the unsustainability of the Terra model but all warning signs were neglected by Do Kwon.

The alleged high-handedness of Do Kwon has been seen as a fraudulent attempt, coupled with the fact that he allegedly tried to liquidate his assets in a bid to move Terraform Labs’ operations out of South Korea. While Do Kwon has denied all these allegations, South Korean regulators have decided to leave no stone unturned and have extended their scrutiny to crypto exchanges.

The regulators seek to know whether the top crypto trading platforms operating in the country have appropriate safeguards to prevent future attacks and devaluation as LUNA and UST. While the investors of LUNA and UST are awaiting a recovery, Do Kwon and his team have launched Terra 2.0 which will operate without the associated UST stablecoin.

The new blockchain and its token has been airdropped to holders of the LUNA and UST token before and after the protocol was attacked. The airdropped token got off to a rocky start as its price plunged from a high of $19.54 to a low of $3.63 over the weekend, according to data from CoinMarketCap. While regulators are seeking answers and safeguards against future occurrences, Do Kwon’s attempt to revive the ecosystem seems to be working for now.

Second Circuit Court Order's Terraform Labs and Do Kwon to Comply With SEC's Subpoena

The 2nd US Circuit Court of Appeals has upheld a ruling that compels blockchain startup Terraform Labs, and its co-founder Do Kwon into complying with a September 2021 Subpoena served him at a New York Conference.

Against initial perception, the subpoena is unrelated to the collapse of the startups’ tokens, including the UST algorithmic stablecoin and Luna Classic (LUNC) tokens. It is, however, related to one of Kwon’s early projects, the Mirror Protocol, which lets users mint synthetic asset that tracks the price of US Securities like Tesla and Apple stock amongst others.

Do Kwon and his lawyers had argued at the time that the Securities and Exchange Commission (SEC) has no jurisdiction over it. Still, the latest ruling by a US Federal Judge affirmed that the regulator has the authority to serve the subpoena, thus invalidating Terraform Labs’ arguments.

“Appellants’ reading of the Rules is contrary to the text and would produce absurd results by allowing a party to insist on service through counsel, but allow the party to block said service by not authorizing their counsel to receive any filings,” the appeals court wrote in its decision.

Part of its basis for declaring that the SEC has the proper jurisdiction is centred on the fact that Kwon’s Mirror protocol which is now unable to function properly with the collapse of UST, is often offered to US investors. The court also highlighted facts in which Terraform Labs paid a US-based exchange platform the sum of $200,000 in order to list the synthetic tokens for trading.

The order to comply with the SEC’s subpoena comes off as one of the many legal woes Do Kwon and his Terraform Labs team are facing at the moment. The collapse of the platform’s associated tokens showed how vulnerable the startup is, and things are not looking better, even though the startup has launched Terra 2.0 after receiving majority backing from the community.

Do Kwon Denies Allegations of Cashing Out $2.7Bn through DegenBox

Do Kwon, the once cherished developer who gained prominence with the rise of Terra Blockchain protocol is now being dragged on Twitter for a series of alleged financial misconducts that possibly led to the collapse of UST and LUNA.

According to a Twitter user, FatMan Terra, Do Kwon allegedly used the Abracadabra protocol, DegenBox, to siphon as much as $2.7 billion from the UST and Terra coffers months leading to the eventual collapse of the Layer-1 protocol. According to FatMan, a Terra insider with affiliations to the Terra Research Forum, Kwon exploited the borrowing design of Degenbox and the promise of its high APYs to generate enough liquidity with which he was able to move out the said funds.

Earlier, it was discovered based on the testimonies from unnamed employees of Terraform Labs that Do Kwon cashes out as much as $80 million monthly, typically deployed to dozens of other wallets. The claim from FatMan is a corroboration of these earlier facts, but Do Kwon is denying them all.

Taking to his official Twitter handle, Kwon criticized the allegations levied against him, noting that they all are false. He said his critics pointed out that he sold off all of his holdings before the crash and that he still retains the tokens from the latest LUNA airdrop. He noted that these two claims are highly conflicting.

“To reiterate, for the last two years, the only thing I’ve earned is a nominal cash salary from TFL, and deferred taking most of my founder’s tokens,” in part because he ‘didn’t need it’ and that he ‘didn’t want to cause unnecessary finger-pointing of ‘he has too much’,” he said, debunking the claims of any forms of financial impropriety.

Do Kwon involves a number of legal troubles from both South Korea and US regulators, and amidst all these, he said people should “Please say things that are proven and true..”